Congress has yet to settle on a final draft of a tax-cut bill but if you’re rich, a corporation or your name is Donald Trump you could be in luck
[dropcap]O[/dropcap]ver the Thanksgiving break Congress will have time to start digesting Donald Trump’s plans to implement the largest tax overhaul in a generation. It already has Trump’s critics – and several leading Republicans – reaching for the Tums.
According to the president, the tax plans had some simple aims: to spur business investment by cutting corporate taxes, give middle-class America a tax break and simplify a byzantine tax system.
It hasn’t proved quite so simple, or palatable. With two versions of the bill now under discussion in Congress, the final shape of the plan is still unclear but some losers and winners are emerging. The clear winners? Rich people and corporations. The clear losers? Poor people, the vulnerable. And America.
The rich
The Trump clan (and his 1% cohort) will be among the biggest winners if either the House or Senate plan becomes law. And one of their biggest wins will go to their families in the form of elimination of the estate tax.
The estate tax only affects people who leave a fortune of $5.49m or above to their heirs. Parents can leave $11m to their children without paying the tax. The House bill doubles that exemption until 2024 and then eliminates it entirely at a cost of $151bn to the taxpayer over the next decade.
Even Steven Mnuchin, Trump’s billionaire treasury secretary, has said admitted this is a move that benefits only the rich. “Obviously, the estate tax, I will concede, disproportionately helps rich people,” he said last month.
The cut would save the Trump family $1.15bn when he dies, according to the Center for American Progress Action Fund.
Gone also would be the alternative minimum tax (AMT), introduced in 1969 to prevent the rich from escaping paying their fair share of tax via tax loopholes.
AMT mainly affects those earning over $500,000, according to Tax Policy Center. In 2005 the rule was responsible for $31m of the $38m Trump paid in federal taxes, according to leaked documents.
Lowering taxes on pass through businesses will also help the rich. Pass through businesses are businesses taxed at the rate of the business owner. The current proposals would cut the top rate these companies pay to 25%, far below the 39.6% highest rate of personal income tax.
According to the Center on Budget and Policy Priorities some 80% of the benefit of these cuts would go to those earning $1m or more – giving them an average increase of $50,000 in 2018. A similar plan in Kansas led to a budget crisis after the state’s tax revenues plummeted and promises of increased economic activity failed to materialize.
Trump controls some 500 pass through entities and he would save about $16m a year from the cuts, according to the New York Times.
Corporations
Trump’s plan would cut the corporate tax rate from 35% to 20%, the lowest point since 1939. The idea is that lower taxes will allow business leaders to increase capital investment and create more jobs.
But the fact is that most US corporations pay far less than 35% tax already, many of the most profitable pay nothing and lower taxes have not been shown to create jobs.
There is also little evidence that the current system is harming business given that both stock markets and corporate profits are at record highs while employment is at lows unseen since the turn of the millennium.
Last week business leaders too seemed to pour cold water on the idea that lower taxes would spur investment, and embarrassed one of the key architects of the bill, Trump’s chief economic adviser, Gary Cohn, in the process.
When a crowd of CEOs at a Wall Street Journal conference last Tuesday was asked to raise their hands if they planned to raise capital expenditures if the tax cuts passed, few raised their hands.
“Why aren’t the other hands up?” Cohn asked, looking uncomfortable. Probably because they are more likely to hand the money back to shareholders in the form of higher dividends and share buybacks.
The poor and vulnerable
According to the Joint Committee on Taxation the latest version of the Senate tax bill would effectively raise taxes for lower-income Americans by 2021.
Starting in 2021, a year after the next election, Americans earning $10,000 to $30,000 a year or less would pay higher taxes if the bill passes thanks to plans to repeal a core element of Obama’s Affordable Care Act.
The Senate bill would kill the so-called individual mandate, which requires all Americans to take out health insurance and hands them a tax rebate in return. Repealing that would leave 13 million more people without insurance and would increase many people’s tax burdens by removing the tax break.
The JCT also calculates that most Americans earning $75,000 or less would be paying higher taxes by 2027. Paying for the tax cuts is likely to mean cuts to social security and Medicare, the federal program that provides health insurance to those 65 and older.
The House bill is also proposing to eliminate tax deductions for medical expenses that exceed 10% of a taxpayer’s total income. More than half of the 8.6 million people who claim the deduction are older than 65, 49% had income less than $50,000, and 69% earned less than $75,000, according to AARP, the lobby group for older Americans, which has 38 million members.
America
Someone has to pay for all these cuts – or add it to the nation’s already massive debt. It has been estimated that the Tax Cuts and Jobs Act (TCJA) would cost $1.41tn but according to the Committee for a Responsible Federal Budget the costs mask $515bn of “gimmicks” and fail to take account of interest costs.
“Ultimately, the Senate tax plan could add $2.2 trillion to the debt. As a result, trillion-dollar deficits would return by 2020 and debt would exceed the size of the economy in just over a decade,” they calculate.
